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Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency

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  • Newbery, David M
  • Stiglitz, Joseph E

Abstract

Standard implicit contract theory can explain wage rigidity but not unemployment and pays insufficient attention to the general equilibrium aspects and constraints limiting the set of feasible contracts. Implicit contracts must specify an enforcement mechanism, can only be conditional on observable information, and must be of limited complexity. Without these restrictions contracts generate full employment which is constrained inefficient. Natural restrictions on enforceability or complexity alone do not produce unemployment, though limited observability may. With two or more restrictions unemployment may result. Specifically, periodic unemployment can arise if contracts are of limited complexity and cannot be enforced through third parties. Copyright 1987 by Royal Economic Society.

Suggested Citation

  • Newbery, David M & Stiglitz, Joseph E, 1987. "Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency," Economic Journal, Royal Economic Society, vol. 97(386), pages 416-430, June.
  • Handle: RePEc:ecj:econjl:v:97:y:1987:i:386:p:416-30
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    References listed on IDEAS

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    1. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
    2. Blinder, Alan S. & Fischer, Stanley, 1981. "Inventories, rational expectations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 277-304.
    3. Honkapohja, Seppo & Ito, Takatoshi, 1983. "Stability with regime switching," Journal of Economic Theory, Elsevier, vol. 29(1), pages 22-48, February.
    4. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-348, June.
    5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    6. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-159, May.
    7. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-380, June.
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    Cited by:

    1. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
    2. Kittel, Bernhard, 2001. "How bargaining mediates wage determination: An exploration of the parameters of wage functions in a pooled time-series cross-section framework," MPIfG Discussion Paper 01/3, Max Planck Institute for the Study of Societies.
    3. Giulio Palermo, 2005. "Misconceptions of Power: From Alchian and Demsetz to Bowles and Gintis," Working Papers ubs0510, University of Brescia, Department of Economics.
    4. Anne Perrot, 1990. "La théorie des contrats implicites : bilan et perspectives," Économie et Prévision, Programme National Persée, vol. 92(1), pages 15-20.

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